What’s Blockchain?

What’s Blockchain?

by , Staff Writer @mp_research, June 29, 2018

According to a recent release from McKinsey and Company, produced by Brant Carson, a partner in McKinsey’s Sydney office, where Giulio Romanelli is an associate partner, Askhat Zhumaev, a consultant, and Patricia Walsh a consultant in the Melbourne office, speculation on the value of blockchain is rife, with Bitcoin, the first and most infamous application of blockchain, grabbing headlines for its rocketing price and volatility.

The selections selected for this report are presented verbatim, though not in the original order. For your convenience, the access to the complete report is found here. https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value

That the focus of blockchain is wrapped up with Bitcoin is not surprising given that its market value surged from less than $20 billion to more than $200 billion over the course of 2017. Yet Bitcoin is only the first application of blockchain technology that has captured the attention of government and industry.

Despite the hype, blockchain is still an immature technology, with a market that is still nascent and a clear recipe for success that has not yet emerged. Unstructured experimentation of blockchain solutions without strategic evaluation of the value at stake, or the feasibility of capturing it, means that many companies will not see a return on their investments. With this in mind, how can companies determine if there is strategic value in blockchain that justifies major investments?

Blockchain is a distributed ledger, or database, shared across a public or private computing network. Each computer node in the network holds a copy of the ledger, so there is no single point of failure. Every piece of information is mathematically encrypted and added as a new “block” to the chain of historical records. Various consensus protocols are used to validate a new block with other participants before it can be added to the chain. This prevents fraud or double spending without requiring a central authority. The ledger can also be programmed with “smart contracts,” a set of conditions recorded on the blockchain, so that transactions automatically trigger when the conditions are met. For example, smart contracts could be used to automate insurance-claim payouts.

Blockchain’s core advantages are decentralization, cryptographic security, transparency, and immutability. It allows information to be verified and value to be exchanged without having to rely on a third-party authority. Rather than there being a singular form of blockchain, the technology can be configured in multiple ways to meet the objectives and commercial requirements of a particular use case.

McKinsey’s analysis suggests the following three key insights on the strategic value of blockchain:

  • Blockchain does not have to be a disintermediator to generate value, a fact that encourages permissioned commercial applications.
  • Blockchain’s short-term value will be predominantly in reducing cost before creating transformative business models.
  • Blockchain is still three to five years away from feasibility at scale, primarily because of the difficulty of resolving the “coopetition” paradox to establish common standards.

Companies should take the following structured approach in their blockchain strategies, according to the report:

1     Identify value by pragmatically and skeptically assessing impact and feasibility at a granular level and focusing on addressing true pain points with specific use cases within select industries.

2     Capture value by tailoring strategic approaches to blockchain to their market position, with consideration of measures such as ability to shape the ecosystem, establish standards, and address regulatory barriers.

3     With the right strategic approach, companies can start extracting value in the short term. Dominant players who can establish their blockchains as the market solutions should make big bets now.

Certain industries’ fundamental functions are inherently more suited to blockchain solutions, with the following sectors capturing the greatest value: financial services, government, and healthcare. Financial services’ core functions of verifying and transferring financial information and assets very closely align with blockchain’s core transformative impact. Major current pain points, particularly in cross-border payments and trade finance, can be solved by blockchain-based solutions, which reduce the number of necessary intermediaries and are geographically agnostic. Further savings can be realized in capital markets post-trade settlement and in regulatory reporting. These value opportunities are reflected in the fact that approximately 90 percent of major Australian, European, and North American banks are already experimenting or investing in blockchain.

The strategic value of blockchain will only be realized if commercially viable solutions can be deployed at scale. The analysis evaluated each of the more than 90 potential use cases against the four key factors that determine a use case’s feasibility in a given industry: standards and regulations, technology, asset, and ecosystem. While many companies are already experimenting, meaningful scale remains three to five years away for several key reasons.

For additional information from McKinsey, please visit here.



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